You are ready to buy a house, you have saved the down payment and you think you are ready to sign. Stop. What about those closing costs? The most difficult part of buying a home is determining the amount you will have to pay for all of the typical closing costs. And what are these fees anyway? The best free mortgage closing costs calculator get it here. This article explains what 27+ closing cost items are. It’s a good idea to understand what you are paying for.
FREE hack below (use our calculator to shop loan brokers)
Home buyers and investors know that the mortgage payments will include some costs in addition to principal and interest. As you read on, you will learn that the interest rate is not the only key factor in being able to close on a new property. Even when you submit a loan application your lender can not immediately tell you how much you will need by the actual closing date.
Closing costs run into the thousands of dollars for most loans so it would be good to understand a cost range. You need to know how much money you will need to buy your selected property early in the process. Our mortgage closing costs calculator below will help you fully understand all costs associated with your purchase.
Before we go into detail, let’s test your current knowledge of the language used by the mortgage industry when applying for a mortgage loan. Here are the key elements in the transaction:
- Cost of the property – Final cost after negotiation and acceptance of the offer
- The amount of the down payment – usually expressed as a percent of the selling price
- Closing costs – Can be more than 25 separate charges and you need these funds along with the down payment to close.
Take our quick quiz before you read on:
Categories of mortgage closing costs
Typical total mortgage closing costs fit into several categories, the categories are as follows:
- Origination Charges
- Services the borrower did not shop for
- Services the borrower did shop for
- Taxes and other government fees
- Prepaids
- Initial escrow payment at closing
- Other
Note: All of the items listed below are included in the mortgage closing costs calculator
Let’s break down the various closing costs into bite-sized pieces. Starting with an example. Assuming the home sale price is $300,000. Should you put down less than 20% which would amount to $60,000, you will pay either Mortgage Insurance Premium or Private Mortgage Insurance Premium. We will get to this fee later, the important thing here is that you have decided to finance $240,000. This is the key number that drives many of the “Origination charges” sections. Breaking down the origination charges section the following are included:
- Points or loan origination fees. A point is 1% of the amount to be financed. Assume that you have agreed to pay 1.5 points. Your cost for points will be $3,600 (1.5% of $240,000 the amount financed)Points are negotiable, lenders charge points to earn a profit from the transaction. Lender “A” may charge 1.25 points while lender “B” may charge a higher rate. Points are also called discount points lender fees which are part of settlement costs. You must understand that the best mortgage rate for points and interest comes from shopping around. Get the true cost of your loan upfront. Your credit score and other factors will dictate the terms that are offered to you. People with the best scores get the best rates.
- Admin fee. This fee is charged by most lenders. Some lenders will not add this fee but instead, add it to other line items. Displaying this fee is their way of breaking down their underwriting fee. Lenders like anyone else have costs of doing business and there may be more included in each of their displayed charges. For example, a credit check fee will be charged on a separate line, they will check credit more than once during the process so that extra cost is included in another line item. You can negotiate this item if you have better overall charges from another lender.
- Processing fee. Another cost recovery line item. Some lenders include this cost in their origination fees. These fees are all part of the mortgage financing process. Some closing statements will have several more items, some have fewer. You may negotiate this fee. This will be a fixed fee and you will not have access to their formula for charging it.
- Tax service fee. Usually charged back as part of any fees the lender has paid to a local government agency for obtaining records or filing. This is a fixed fee.
- Settlement fee. Another term for many of the fees above or added as a separate fee.
- Application fee. Some lenders charge an application fee others do not. This is negotiable.
Additional fees you have agreed to pay
You will during the process have agreed to pay some costs associated with your property. Home inspection fees are part of the process. Some buyers pay for this fee before closing, others ask for the fee to be part of closing. Investors may want some fees paid in closing for accounting purposes. together.
On occasion, the buyer will agree to have work done to the property before the real estate transaction closes. Funds to pay for this will be added to the total funds required at closing. Just add these costs to the mortgage closing costs calculator in the other section. Various fees can include additional work that the closing attorney was required to do on behalf of either party e.g. transfer property from an LLC to the seller’s name to facilitate closing.
Services that the buyer did not shop for
There are a few fees that the buyer must pay for which they can not shop for but may be subject to negotiation and they include:
- Appraisal fee. A fee is required by the lender. You have no choice as to the appraiser, your lender will choose a firm that chooses at random an appraiser.
- Credit report fee. As mentioned above, this may be one of two such charges to check your credit. The reason for charging this fee is that there is a cost to the lender also because people who can not quality run up the cost of credit reports and this helps the lender to recover those costs.
Mortgage Closing Costs that the borrower did not shop for
- Abstract or title search. Lenders require a title search to insure the sellers own the property and that there are no liens against the property. This is an important task and one of several below which are all title-related costs. Before the title insurance policy can be issued, the property must be clear of all incumbrances. Title services accomplish this task by reviewing all public records. On occasion, a lien is found and the title insurance company will work to clear it. If it can not be cleared the transaction will terminate.
- Closing protection letter. This letter issued to the lender informs the lender that the title insurance will be given at closing and that for all intents they can proceed with closing.
- Lender’s title insurance policy. The actual policy helps to protect the lender and to a lesser extent the buyer. This firm title insurance policy is made for the financial institution. Title insurance policies are rarely used but will help save your property if there is a future claim of ownership. This is when the title fees are earned.
- Settlement/closing fee. This is a fee to cover settlement charges, the actual income earned by the escrow company for their settlement services including documentation, filing, and disbursing funds.
- Title insurance binder. A commitment to a title insurance policy
- Title update fee. Another fee goes to the escrow company for their services to provide a last-minute update before closing
- Wire fee. Cost to wire transfer funds to the seller’s lender and other parties to the transaction. Sometimes there are courier fees added for the delivery of documents.
- Other costs. Other costs charged by the title company are to be identified.
Taxes and other government fees
- Deed recording fees The entire process requires at the end, that the deed be recorded. The escrow officer will ensure that the purchase deed is properly recorded with the local government.
- Mortgage recording fee. Deeds and mortgages require recording. There may be fees charged by the local government to record these documents. The closing attorney/escrow officer must record the mortgage in favor of the mortgagee.
Prepaids/Escrow/Other
- Homeowners Insurance Premium – This is a charge to the buyer for their annual homeowner’s insurance policy. The monthly payment will usually include hazard insurance required by the lender. This starts the process by guaranteeing that there is a policy in place at the start of the loan. The buyer has a choice of the insurance company and should have selected one in advance of closing.
- Mortgage insurance premium – This is a one-time fee required for FHA and some other government loans. This fee is charged based upon x months required. This fee is only required for loans of less than 20% down.
- Pre-paid interest. Lenders charge interest for every day the borrower owes money to the lender. If the property is scheduled to close on the 28th of the month then interest will be charged for each day to the first of the next month. This helps put the program on a normal monthly payment basis. The proration is based upon using the interest-only portion of the loan and dividing it by 30 days and multiplying by the number of days before the first of the next month.
- Property taxes. Depending upon the date property taxes are due in a jurisdiction, there may be an amount in this box.
- Aggregate adjustment. The seller owes real property taxes for the year which are paid in arrears. If for example annual taxes were $2,000 and the purchase took place on July 1, the buyer would owe the seller 6 months of taxes or $1,000. The buyer receives these funds in closing which usually go into the impound account if there is a loan. When the taxes are due at the end of the year, the lender will use the funds from the seller plus the monthly deductions from your mortgage payment to cover the annual taxes. When using our mortgage closing costs calculator always enter as a negative.
- Homeowners’ insurance escrow. Lenders usually require an escrow account to accumulate sufficient funds to pay homeowners’ insurance when it is due the following year. They will require x months of insurance to start the process. Regulatory agencies require that the lender collects at the time of closing x months of insurance. If your annual policy is $1,200 and the lender requires that 5 months be held in escrow. This means that 5 x$100 (12th of $1,200) be retained for a total of $500.
- Mortgage insurance. FHA requires in addition to an upfront fee for loans with less than 20% down payment, a monthly fee. If your monthly fee is for example $50 and the lender requires five months, the total collected at closing would be $250 which goes to escrow.
- Owners title policy. The buyer can purchase an owner’s title insurance policy which is optional. Such a policy is designed to protect the buyer if a claim is made against the property for something that occurred before the purchase.
- Other charges. These can vary from pest control to home inspections or other charges that would be incurred by the buyer or seller and which the vendor agreed to receive payment from closing. Investors often want other charges to be managed through the closing process for record purposes. Paying third-party fees through closing is common. On occasion, a real estate attorney is used for part of the process and those fees can be included. Only actual fees will be paid, this process is not designed as a banking facility.
Other accounting items can be included such as the seller offering to pay some closing costs. The total amount required by the buyer will be reduced by the amount of the credit moved to the buyer’s side of the ledger. The above is fairly comprehensive of the costs that the buyer will be responsible for. When using our mortgage closing cost calculator just use the other block for a seller’s credit.
The seller will be paying the real estate commission and other costs that the buyer has already agreed to cover such as repairs. In these cases, some contractors may submit invoices to the escrow agent for payment through the closing process.
Unfortunately for example purposes, there are no average closing costs. Some are variable based on the specific sales price, amount to be financed, and other factors. Some are fixed by the vendors e.g. closing attorney/escrow. Their fixed fees may be variable but you will not have access to their pricing matrix. Entering data into our Closing Cost Calculator will provide you with the best estimate of total closing costs.
The best free mortgage closing costs calculator: get it here
Data for the mortgage closing calculator
Most of the blocks that would be difficult to fill in have example numbers from actual closing costs. This is a start. So where can you find accurate data to enter?
FREE Hack: Compare loans and mortgage brokers
Start with your prospective lender. This is going to be a hack that you can use to shop for lenders. The first section of this form deals with costs that come from the lender and not the escrow closers. Lenders compete with other lenders for your money.
Be prepared to provide information that the prospective lender needs to determine your credit score and ratios. You can get a head start if you read one of a few articles listed at the end with calculators that can help determine your ratios. When they have run your credit, time to make sure they earn your business. Ask the following questions and enter the data:
- What rate of interest will you charge
- Loan points, what percentage will you charge me?
- What is your administration fee? Is it fixed or variable in the event I decide to buy a different price house?
- That processing fee, how much?
- Estimated tax service fee what is that?
- Estimate the appraisal fee for me
- How much is the credit report fee? is there one or more?
- Any other fees
- If you getting FHA with <20% down ask for MIP costs (upfront and monthly) your broker has this info.
More data required
Get a quote from an insurance agent to calculate the amount of the annual rate and the estimated escrow. Use 5 months to be safe for escrow. Ask your real estate agent for the annual taxes and use these numbers. Estimate 5 months of property tax impounds.
If you are not paying cash for a home inspection and want it impounded factor this in as well. Any other costs not already in the calculator you will need to add. The results will not be accurate but they will be close. By the close, I mean generally within $1,000 from the actual total cost and probably much closer than that.
Close is not enough? Contact the escrow office that has been tasked with closing. Ask what their fees are for a loan of your size and type. You can do this before you make an offer if the agent knows who they would use for the transaction. Even if you go to another firm, the costs should be similar in the same area.
Resources to help
KEYLADDER specializes in residential rental investment property. This article applies to both individuals buying their residential property to occupy and our investor friends and students. Mortgage closing costs for investors will be slightly different although many of the costs will be different the categories are similar. Try our commercial real estate loan calculator here
Please visit this series of articles that were written for Millennials to achieve financial independence. There are valuable calculators in the articles that will help you understand the loan qualification process. They are:
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